By Ajay Bedi
Intriguing is a word well suited to the defence and aerospace sector globally because of its complexities. The intertwined technicalities, its codes and features make it very challenging for a common man to understand.
These industries/sectors are technology-oriented and are strictly driven by safeguarding the innovations, inventions and latest technologies. The trade secrets and information are considered to be long term revenue-generating tool; therefore it’s always well-guarded and documented.
The purchase of any new equipment falls under the ambit of “Capital Procurement”, be it a gun or and fighter aircraft. The Capital Procurement process and procedures are extremely thorough, comprising the minutest of the details of the respective equipment/items, one considers buying. It entails purchase cost, maintenance cost/life cycle support cost etc., generally, it covers the maintenance for a span of three to five years -- which is a universal industry norm.
The cost breakup works as an indicator towards the maintenance beyond the support years. In this sale and purchase process, the seller company gets the biggest mileage is the “Original Equipment Manufacturer” (OEM).
The OEM term is considered to be well defined however in my view, it is not well-conceived interpreted or explained. We view Boeing, Airbus, Lockheed, General Atomics, Northrop Grumman, Honeywell, Denel Dynamics, Saab and Airbus etc., as the OEMs but in reality, they are the “integrator or assemblers”, who assemble various products and convert them into a finished product, which could be sold off the shelf.
Having said that it does not take away from them the expertise in their field, because they conceived a product and with support of companies down the line (Tier 1 & Tier 2 suppliers), they have manufactured a product, which is visible and tangible.
The OEM term is well suited when we are looking for Capital procurement, but it would not be well suited when we look into the maintenance side. There are many “MRO’s (Maintenance, Repair, and Overhaul) agencies/companies are there into the field and they are not the new players in the arena. They are the Tier 1 and Tier 2 suppliers, which are producing various components and assemblies for the so-called OEM. They have consolidated their position and started providing the maintenance services to the clients either directly or through OEM.
Today, the Aerospace and the defence industry are going through a transition period and it would not be wrong to say that these industries are ever-evolving. It is critical for these industries to evolve as they thrive on new inventions, innovations etc.
Since it’s the era of consolidation and we all are looking to exploit the niche capability of each company we deal with, it would be well suited to the industry that we must bifurcate the maintenance from Capital procurement, which means that the OEM should concentrate more on the Research & Development and the MROs take care of the periodic maintenance and upgrades.
There is an urgent need to tackle obsolescence in the defence sector; therefore, almost 5-6 per cent of the existing platforms every year need to be replaced annually. In normal cases, only around 3-4 per cent is required to be replaced. This shows that the maintenance/service side needs to be addressed with more vigour technically as well as financially, as obsolescence cannot be weeded out immediately.
In both aspects, the MRO will play a vital role as they are well equipped to cater to the service, repair, maintenance and upgrades of various platforms under one roof. By doing so the OEMs could channelize their core competence towards developing more advance and innovated product by emphasizing more on R&D. Whereas, MROs provide maintenance at a more competitive cost.
MRO market in India
India is expected to buy approximately 750 numbers of aircraft and helicopters in the Defence sector according to the Planning commission estimation done for 13th plan (2017-22).
The total defence MRO market segment in India is projected to reach an approximate figure of $2.5 billion by 2025. The MRO was non-existent in 2010, however, now state-owned Hindustan Aeronautical Limited is the flag bearer in maintenance for the Defence / military aircraft. And is currently overloaded with work as it is providing maintenance and repairs on the military planes including rotary and static.
This has opened up a window for the MROs to play a major role as they can provide these services directly or could get into the Joint Venture (JV) with some existing defence player here in India. Even the Defence Procurement Procedures (DPP)-2008 have provisioned for this.
The military depots are also trying to enhance their capabilities, but they definitely need the support of the well-known MROs to cater to the technical aspects of the things, we need to create synergies between the military depots and the private MROs.
While selling their new product the OEM offers to provide service and maintenance for an initial period, which helps the customer’s workforce to get acquainted with the process. And, also the procedure of maintenance in accordance with the specific standards which are laid down by the OEM or the country of its origin. It also reduces the lead time associated with component service.
The one step towards this direction has been initiated by Indian Navy where they have involved the CFN International to cater to the Boeing P-8I engines. The CFN international provides on the job training to the Indian Navy workforce, engineers, technicians etc., for its engine CF56 at their newly opened Hyderabad centre. This is the first major step towards this but this needs to be expanded to tip to tail, or other aspects of maintenance and service.
The combined projections for the Indian MROs spending in Civil & Military are expected to reach above $ 45 billion, during the period 2010-2025. The other advantage India possesses is the location as there is no renowned MRO facility in the Asian region.
With these MROs, it would be more economical for the customers to have an AMC kind of agreement with certain number of flying hours, or a particular number of shots fired by a gun in a stipulated time; this would be a game-changer approach for the customer whose inventory is old or obsolete.
(Author is an independent Defence Market expert. Views expressed are personal.)